Delta Airlines Looks To Soar with Private Equity –

When Delta Airlines hired Terry Blaney from Washington State Investment Board a year ago to take an aggressive stance in building its private equity program, the buyout community trumpeted the move.

Mr. Blaney, well known for turning Washington into one of the larger LBO investors in the mid 1990s, was expected to make more buyout recommendations at Delta (BUYOUTS May 18, 1998, p. 4).

A year later, however, Delta and Mr. Blaney are playing to mixed reviews. Delta is steadily building its exposure to private equity, but it is cautious about investing in buyout funds.

The good news is that Delta has put a program in place to increase its exposure to private equity. Delta manages $11 billion in master trust assets and has $600 million, 5.5%, of that capital invested in private equity, and it plans to increase that to between 8% and 10% in the next three years. Delta expects to commit between $300 million and $400 million a year to the asset class until it reaches its allocation level. “The strategy is to move towards our target while retaining an opportunistic approach,” says Mr. Blaney, who manages Delta’s private equity program along with assistant Yvonne Bates. Delta does not rely on consultants in making private equity decisions.

A Taste for Venture Capital

The bad news, however, is that in Mr. Blaney’s first year, Delta has made six of its nine commitments in private equity to venture capital partnerships. The commitments have included investments with BCI Advisors, The Centennial Funds, Frazier Health Care and Richland Ventures.

“We’ve tried to tilt our commitments towards venture capital in the short term because we think we will earn better returns there,” he says, adding that he believes many buyout firms need to develop new models in a booming economy to drive good returns and may not be able to re-invent themselves.

“The buyout business is becoming increasingly difficult. There is a major revolution in the U.S. economy that lends itself to venture capital investing,” he says.

Mr. Blaney says Delta is looking to commit to buyout firms that have “a differentiated implementable strategy and a history of success in the industry.”

He says he believes roll-ups, platforms and growth investments can work but says many buyout firms still have experience generating returns only through financial engineering.

Delta did establish two new relationships with buyout firms in the past year-committing to Clayton, Dubilier & Rice Fund VI, L.P. and Warburg Pincus Equity Partners, L.P., which it considers both a buyout and a venture capital partnership and counts as two separate investments-and it renewed with Cravey, Green & Wahlen and Welsh, Carson, Anderson & Stowe

Mr. Blaney declined to reveal the amount of the investments but did say that Delta likes to commit between $30 million and $40 million per partnership, an increase from $20 million before his arrival. Delta has been investing in private equity since 1984 and has concentrated its buyout commitments with Forstmann Little & Co. and Welsh Carson.

Delta Has an Open Door Policy

The L.P. has an open door policy and will consider committing to any buyout firm with partners who have direct investing experience.

Mr. Blaney says he is not interested in any firm that surfs in the same waters for investments as Delta’s other buyout partners. He says he would be more interested in industry specific funds that give Delta exposure to new areas.

Delta, though, is careful to only commit capital to G.P.s whom it can trust to stick to their investment mandate.

Zero Tolerance for Rule Breakers

Mr. Blaney says he is seeing too many examples of G.P.s that state a strategy in the partnership agreement and then vary from their plan.

“We have responsibility to our management, and when we see a plain vanilla firm buying a company in the fuel industry, and we see a firm starting a telecommunications company in Peru, it gives one pause and it gives my boss pause,” Mr. Blaney says. James Taylor is the chief investment officer at Delta.

Delta protects itself as best it can by asking for seats on firm advisory boards. The airline also expects to receive no-fault divorce clauses, key-man provisions and limitations on diversification from a stated strategy in its partnership agreements.

For now, Delta does not make direct investments and is not looking to commit capital to firms raising international funds outside of its existing relationships. Delta presently invests through Advent International and HarbourVest Partners, LLC’s international fund-of-funds.

“The reasoning behind it is that we need our capital to do what needs to be done domestically,” Mr. Blaney says.